Serial cost allocation in the cooperative purchasing organization

Abstract

Under the seller’s quantity discount, buyers self-organize or rely on a third party to aggregate their purchasing quantities to obtain lower prices. Because of the unequal member contributions in the cooperative purchasing organization, the buyers’ strategy is different, the members often fluctuate, and the organizations do not sustain themselves. An effective mechanism is necessary to improve the performance of purchasing groups. We study the various forms of cost allocation mechanism in practice. Different allocation rules may have influence on the buyers’ behavior (i.e., purchasing quantities, whether joining the organization or not). We analyze the serial cost allocation and equilibrium purchasing quantity based on a Nash equilibrium, and the results show that each buyer is worse off when not participating in the existence buying organization of the other buyers. We further find that the serial mechanism just confirms the most efficient Nash equilibrium: reasonable cost allocation rule is necessary for the subjects to identify their optimal strategy.